Single farm payment in the European Union and its implications on New Zealand dairy and beef trade

Dairy products and beef are New Zealand's main export commodities, accounting for 22 per cent of total merchandise exports (Statistics New Zealand, 2005). The European Union (EU) is commonly known for distorting international trade in these products through subsidised production and exports. This leads to lower world market prices and hence lower export revenues for New Zealand. On the other hand, New Zealand benefits from high domestic EU prices through preferential access to the butter, cheese and sheepmeat markets. The Common Agricultural Policy (CAP) of the EU has already undergone several reforms in recent years. The 2003 CAP reform replaced the coupled direct support schemes by a Single Farm Payment (SFP), which will be mainly delivered to farmers irrespective of what they produce (hence 'decoupled' from production). The level of decoupling differs among the EU Member States. This report assesses the implementation of the SFP across Member States and how far it has been decoupled. The expected changes in the European Union's and New Zealand's trade in dairy products and beef resulting from the 2003 reform of the CAP are simulated, using a partial equilibrium trade model (Lincoln Trade and Environment Model; LTEM). The hypothesis is that a higher degree of decoupling of direct payments leads to a lower production and less EU exports. Hence, opportunities for NZ exports of dairy products and beef could increase. The results from the dairy sector are the opposite of the hypothesis: EU exports in dairy products are predicted to increase following the reform and this implies New Zealand exports to fall by 1.5 per cent to 2.0 per cent. This is due to a rise of the internal milk production quota in the course of the reform which outweighs the impact of the decoupling of the dairy premium. In the beef sector, EU outputs will be reduced as a result of the 2003 CAP reform. The market changes in the EU, however, are only partly transmitted to New Zealand because other beef producers also benefit. The returns to New Zealand beef producers increase by more if full decoupling in all EU Member States is applied then in case of only partial decoupling.